Ways in Which Firms Can Use Information Systems to Reduce Bargaining Power of Customers - Coursework Example

DISCUSS THREE WAYS IN WHICH FIRMS CAN USE INFORMATION SYSTEMS TO REDUCE BARGAINING POWER S Introduction Presences of buyers who appear to be powerful tend to reduce the potential profit in any industry or market. Customers increase the competition in the industry by compelling prices to be reduced, bargaining for the improvement of the quality and even more services, and they also play competitors against themselves. The outcome of this is the reduction in the profit in the industry. Information system is very important to the organization in the following ways; the objective strategies of any firm always drive the information system strategy in the organization, this is because the information system will be structured according to firm strategic objectives (the American west air line). Information system also helps in identifying opportunities to for the company (eat2go business). Lastly information system is and the firm strategy impact each other in that the firm objectives depend on the information system for new opportunities and the information system also depend on the firms’ strategy to execute the available opportunity (wills Technology Company) ((Boddy, Boonstra and Kennedy, 2008). Customer relationship management is basically a general term that entails the ideas used by firms to manage customer relationship with them. They may include customer satisfaction, the attraction of customers, and also customer analysis. Basically there are three types of customer relationship management which include, operational customer management which refers to services and products that allow a firm to take good care of their buyers, an analytical customer relationship management which mainly focus on customer information analysis for various reasons, and collaborative customer relationship management which mainly entails the communication with customers (Chen, and Popovich, 2003) The porter’s forces normally use the information system to do statistical analysis within the organization and the industry as a whole. Customer relationship management uses information system so maintain an active communication with the customers. The generic strategies must use information system so to be effective in their quest for the reduction of bargaining power of customers (Porter, 1980). The five forces according to porter that helps in shaping the market are substitutes, rivalry, buyers, new entrants, and suppliers. Generic strategy can thus be said to be a framework that is used to outline three main strategic options that is available to the firm that would wish to obtain a competitive advantage that is sustainable. The three generic strategies are differentiations, leadership cost, and focus (Miller, 1992). WAYS OF RUDUCING CUSTOMER BARGEINING POWER USING INFORMATION SYSTEM. Information System Information System (IS) is said to comprise of computers or people who interpret or process the information. at times the term can be used in a sense that is more restrictive which can only refer to the software only used to operate a database that is computerized or to mean a computer system within the organization or the firm in question (Mahadevan, 2000). Information systems is also a scholarly study with respect to systems in relation to exact reference relating to the complementary network of software and hardware, data that organization and people employ to obtain, create, filter, distribute , and process the information. Emphasis is put to the Information System that has definitive Stores, Boundary, Inputs, Users, Processors, Outputs and a good communication network (Boudran, 2010). The main objective of any specific information system is to give support in decision making, management, and operations of the firm. information system thus is information and communication technology (ICT) that a firm employs, and also the means in which individuals interact with technology with an aim of supporting the business processes (Shim, Choi, and Suh, 2012 ). BARGAINING POWER OF BUYERS The presence of a strong group of customers in the industry, can really impact on a firm’s product and decisions relating to selling of a given commodity. The superior that customers can employ is to force the reduction of prices of various commodities, which will automatically influence the potential profit in the industry. Buyers too can demand high quality of products or services, and enhanced competitiveness by compelling various firms into price wars. All these actions by the buyers result into a decreasing the attractiveness of the market by reducing its profitability. Bargaining power posed by buyers or customers will be powerful and strong depending on market conditions and its characteristics, and the sales revenue that they produce. FACTORS THAT DETERMINE STRENGTH OF BUYERS Several types of market environments exist which can determine if the buyers have power or not. Some of the conditions explaining this phenomenal are: Buyer Concentration, this is where there are few buyers in number and is highly concentrated. In this scenario the customers has more power than the producers. As a result the producer revenue will depend on the few buyers and they cannot ignore their demands. However if the customers are widespread, it implies that their business is also smaller and they can easy to be assumed. Percentage of Sales, if the volume of sales with respect to a single buyer is significant, the producer thus will not risk losing his/her business. Undifferentiated products, in a case where the producer sells undifferentiated or standard commodity, then there is a possibility of customers switching to other producers. And in the event that many producers exist who are dealing with the same product then the customers will definitely explore other means. Thus if a company want to remain relevant in the industry then it has to really work hard and differentiate its products for it also gain a competitive advantage over its rivals in the market. Switching Cost, if the cost of switching are relatively low for a customer, then any slightest dissatisfaction with a product will result to a loss of the business because the buyer will get an alternative without any difficulties. Thus the producers have to think well before increasing the price for any product to avoid this unpleasant scene to occur. Price Sensitivity, if the customers are very sensitive to price changes, any change in the industry will make the buyer to shift his/her loyalty to another producer. This gives the buyers more bargaining power over the producers thus they can easily switch to other producer should price change in any magnitude that may not please them. This call for organizations to be very sensitive with the prices that they levy on the customers. Available Substitutes, the availability of many alternatives or substitutes in the industry will enable the buyer to have numerous options to shop and switch around thus making their authority over the products offered to be felt in the market. Analyzing Bargaining Power of Buyers. The generic approaches of Porter outlines a detailed interaction of minimization cost approach, market focus strategies, and the differentiation of product strategy. The generic approaches avails a good interaction between minimization cost approach, product approach differentiation, and market focus approach (Porter, 1985). Cost leadership strategy involves the company’s winning industry share through appealing to a price-sensitive buyer. This is obtained by having a market target segment with least prices, or lowest price compared to what customers receive. For example the case study of Amazon is a typically example of a firm that is using cost leadership strategy because: First all the products of Amazon are posted in their information where one can just log in to their website and get all the detailed information needed on a given product. For instance the case of canon printer if you need to buy one, all the information relating to it plus the ink that it can consume and the a4 paper that it can use while printing. Amazon has also a packaged deal for its customers where for instance if you buy a printer plus two canon a4 papers, then they give you a 20% percent discount. Amazon is thus reducing the cost of ordering since its customers can easily locate the information of a given product that one wish to purchase in the wishing list, the buyers too can locate or access the information of a given product accessories or products that are related to one another e.g. the camera and camera case. Due to the fact that majority of the online shops do not give such information as Amazon does, many customers prefer to shop in Amazon. Amazon is managing a good customer relationship by maintaining an interactive session with its customers in its website through the use of information system that it owns. Because of this Amazon has indeed created a long term relationship with its customers and also managed to maintain the loyalty of its customers. This they have achieved by gathering and the dissimation of information or data to their customers via its information system. the benefits that Amazon is enjoying as a result of using information system to reduce the bargaining power of its customers is by reducing the cost of ordering, they have also managed to reduce the time spent to serve their customers. using information system in cost leadership strategy has help Amazon in reducing the bargaining power of the buyers and thus gaining a competitive advantage compared to its rival firm like the e-bay which does not have its own information system. Amazon firm attain this by employing the following two methods: The first method is to obtain high asset utilization. This strategy means that a fixed cost is speeded across big number of functions of the service or the product, which eventually result into a reduced cost of production. The second approach is by achieving low indirect and direct costs of operations. This can be attained by giving large volumes of products that are standardized, limiting personalization and customization of services among others. Cost of production are kept low by utilizing less components, limiting the number of models that are produced, and by employing components that are standardized. Maintaining this approach needs a strategy requires a continuous search for reduction cost in all spheres of business. They can include increasing the capacity of asset utilization, outsourcing, minimizing of some costs including advertisement, distribution, and research and development. Promotional approach normally involves the trial of making virtue out of the low features of production cost. Cost leadership approach can only be applicable to big companies who normally have the advantage of enjoying big production volumes and economies of scale. Small firms cannot be cost leaders but rather cost focus in the event that they enjoy any advantage that is sound to costs that are low(Murray,1998 ). Cost leadership approach can have the disadvantage with regard to low customer loyalty, a buyer that is price sensitive will shift his loyalty once a lower price substitute is presented in the market. Differentiation approach of services or products is done so as to make the competition to be successful in the market. Some of the successful differentiated approaches are the Asian paints, Honda, Hul, Nike athletic shoes, Renault Nissan alliance, among others. Differentiation approach is valid if the target customer is not price sensitive, the industry is saturated, the needs of the buyers are very specific and in most cases they are not fully served, and that the company has got distinctive capabilities and resources that enable the organization to meet the needs in way that are not easy to imitate. Successful differentiation can be seen when a firm attains either premium price, increases the revenue, or the buyers loyalty to buy the firm’s brand. Differentiation results to profit if the product added price is more than the expense added to get the service or product but remain ineffective when its distinctiveness is easily replaced by the competitor (Arthur et al, 2010). Differentiation method is not good for small organizations. It is more suitable for large companies. To use this approach with attributes all through predominant degree in given functional groups (purchase, inventory, finance, marketing, etc) (Kedia et al 1990). This opinion is critical. The case study of dell is a good example of a company that is applying the use of differentiation to gain competitive advantage over its rivals. Dell as a company has differentiated its various products based on color that a customer may prefer, the software and the hardware that is preferred by the customer. Because of this dell can manufacture a computer according to the customer specifications. Many companies has a result do get their computers from dell company with the specified features that suits them. The advantage that Dell Company enjoys as result of the differentiation of its products based on the customer specification, is that they are getting higher revenues than their competitors; they are able to reduce the customer bargaining power as result of the product differentiation. Dell has also maintained its customer relationship with the help of its information system where they have always maintained an active communication with its customers. this has helped them to get the information or feedback from their customers on what they prefer and how they would like they product to look like. This has enabled dell to have a clear market target of its customer base. Due to this unique feature of Dell Company that is standing out among its major rivals e.g. the apple, and Lenovo, dell has managed to gain a competitive advantage and eventually has managed to reduce the bargaining power of customers and has increased the loyalty of its customers. This is evident because Dell has managed to increase its market share thus increasing the its revenue Types of differentiation Strategy The value shareholder model, believes that a good timing is needed to employ the specialized knowledge which results into differentiation advantage provide that the knowledge remains distinct Walter (2010). This model postulates that buyers purchase services or products from a company so as to get its unique knowledge or skills. This advantage is not dynamic but rather static since buying is one time procedure. The model of unlimited resource, use a bigger base of resources which allows companies to outsmart competitors by employing differentiation strategy. A firm with large resources can sustain profit and manage risk with a lot of ease than the company with less resource. This only gives advantage in the short run only. The general knowledge is that if an organization lacks innovation that is continual, sustaining competition in the long run will be elusive (Furhan, 1979). The focus strategy is not considered as a separate approach for big firms because of small market status. Big firms that chose to use differentiation approach may also select to use in combination with the focus strategies. Moreover this is certainly suitable strategies for small firms especially for the ones who want to competition with big firms. Incorporating the narrow focus, the firm mainly focuses on few market targets (also known as niche strategy). These ought to be unique groups with specialised requirements. The decision giving lower prices or differentiations of services or products should relay on requirements of the chosen segments and the capabilities and the firm’s resources. There is hope that when a firm focuses its marketing efforts to one of the market narrow segment and also structuring its market mix to these unique markets, the firm can fulfill the desired needs of the market that it targets A focused approach should thus target market segments which are less vulnerable to the possibility of substitutes or in segments where a competition appear to be is weaker attain a return on investment that appear to be above average. Focusing implies choosing targets and optimizing the approaches for each of them. Focus strategies further divides the industry. They can be copied, but can also give strategic openings (Davidson, 2003). This it is always important to select an approach that cannot be easily imitated by the rivals in the industry. An example of firm that is employing the focus strategy is the Abercrmbie and Fitch (A&F) company in our case study. A&F has its own information system that shows’ how many products are still available for sale, the system also indicates the number of products that are still left in the stock, the information system also displays the information about a given product and the discount that is available to that given product. In addition to this the A&F information system can also display products that are new, discounts, and promotions to their esteemed customers so that they can have full information about the product, the cost, and the prices that they go for. The main advantage that A&F is enjoying over its competitors like super dry, jack wills, is that as a result of using information system, it is able to take stock controls thus reducing the storage cost and also the inventory with immediate effect. A&F is also managing its customer relationship management properly well by maintaining an interactive session with their customers through their website. they do this by updating their customers on the new products, offers and promotions, informing them on what is left for sale in their stock which ensures that they do have a good relationship with their customers as compared to their rivals in the industry. This is because the firm is mainly focusing on few market targets in the clothing sector. It has unique features compared to its rivals since it uses information system to enhanced its business and in turn reduce the cost of storage and inventory thereby reducing the bargaining power of buyers. A&F Company above mainly focused on the market segment in the laundry business which appear to be less vulnerable to possibility of substitutes in that market of laundry business. And the fact that it is incorporating the use of information system to run its business, it has indeed cut a niche for itself in that market. Conclusion It is very important for any given firm within an industry to know its market niche and market target or the target group. The porters five forces which are new entrants, suppliers, substitutes, rivalry, and the bargaining power of buyers has to be analyses properly well if the company is to succeed in the competitive industry. Failing to do this can result to the firm leaving the market or even closing down. Thus a wise manager will pay attention to the five forces which normally end up shaping the market. The use of information system in today’s business cannot be underrated by all mean. Organizations today must be up to date with the current technology so as to remain relevant in the business world. It is important that the use of information system can really help the firm in many ways, for instance it can helps the firm in forecasting on future sales and the future revenue, it can help the firm to transform raw data into management information that can be used in the firm. Information system can also be used by the organization in maintaining a healthy relation of the firm and its customers via their use of customer relationship management (CRM). It is also very important for different firms or companies to incorporate the use of information system so as to reduce the bargaining power of customers and hence gaining competitive advantage of their rivals in the same industry. This will be possible because a firm will reduce the cost of production and also the time of delivery, and also the ordering time. Finally information system is very significant to any firm who want to remain relevant to the changing market of today’s world. 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